Thursday, May 24, 2012

I'll Take "China" for 500, Alex

In many ways, China's rise is nothing different than other east Asian countries have done--except for the vast size of China which makes the results more dramatic. The question is how long will China continue their growth rate? Eventually, China must slow down and anyone who argues the Chinese system uniquely allows for high growth rates indefinitely is just silly (or possibly Tom Friedman).

Why must China slow down? Because, as I've droned on about for years, eventually China runs out of peasants or places to put peasants in the cities:

For catch-up countries, growth is mainly about resource mobilization, not resource efficiency, which is the name of the game for lower-growth rich countries. Historically, about two-thirds of China's annual real GDP growth has come from additions of capital and labor. Mainly this means moving workers out of traditional agriculture and into the modern labor force, and increasing the amount of capital inputs (like machinery and software) per worker. Less than a third of growth in China comes from greater efficiency in resource use.

Those who expect China to stumble sooner may be making the mistake of thinking that the lack of qualitative growth makes the quantitative growth less real. But China's growth is real, different from our growth (not superior--just how would a "reasonably enlightened despot" in America make China's input model work here when we are long past that growth stage?), but not destined to go on forever even if we under-estimate how long China can keep plugging in inputs and get good results.

As an aside, the article says that housing will not be the bubble that bursts China since despite stories of "ghost cities" of vacant housing there is actually a shortage of housing in China.

So the question is when does China slow down? As an American, I can be excused for wondering whether China slows down before surpassing America in gross GDP. But the more relevant next question is what kind of effect will that slowing of growth have on China?

Although most Chinese have benefited from economic growth, the top tier have benefited obscenely -- often simply because of their government or party connections, which enable them to profit immensely from land grabs, graft on construction projects, or insider access to lucrative stock market listings. ...

At the root lies a political system built on a principle of unfairness. The Communist Party ultimately controls the allocation of all resources; its officials are effectively immune to legal prosecution until they first undergo an opaque internal disciplinary process. ... In a few years' time, China will likely surpass the United States as the world's top economy. But until it solves its fairness problem, it will remain a second-rate society.

One, I wouldn't count on America losing the top slot for good. Honestly, I worry about China. But I think we can cope with China's rise, China's collapse, or anything in between, and still be just fine. China's rulers are in more jeopardy in regard to the question of China's future than we are.

So the more important question is whether the prospect of remaining a "second-rate society" is what should worry the Chinese?

China is doing what other nations in east Asia have done. As I said, it is only the sheer scale of China that makes China's rise seem qualitatively different than Japan's, South Korea's, or Taiwan's rise. Doesn't China's size also make the effects of losing vast growth more unpredictable? And isn't the fairness issue between provinces of China at least as important as the personal unfairness?

We keep debating the future of China as a unitary actor. Why can't China have multiple futures? As I've written before:

With a state both cruel and failing economically, governing a continent-sized population with a history of fragmentation, I don't know why we need to guess which course the government of China will follow. The continent of China is big enough that it could follow all the possible paths.

There are many questions about China's future. And we don't know who will answer them.